DECC Must Resume Publication of Policy Price Impacts

Date: 07/02/16

Dr John Constable: GWPF Energy Editor

It is becoming increasingly difficult to form a reasoned view of the cost impacts of energy and climate policies in the United Kingdom, and government is not helping the situation, since it no longer publishes the fine details of its own estimates.

Admittedly, the situation is extremely confusing. Falling fossil-fuel prices, led by oil, and largely beneficial to consumers of course, should result in lower electricity generation costs, and indeed to lower capital costs for new gas-fuelled generators.

It is also true that these low fossil costs should reduce the capital costs of renewable generators such as wind and solar, since this capital equipment is an output of the fossil economy. This might perhaps lead to an opportunity to further reduce renewables subsidies. However, CAPEX, though central, is not the only the matter of concern to investors, with Operation and Maintenance costs increasingly prominent. While O&M costs might be reduced by low fossil fuel prices (cheaper helicopter rides to offshore wind farms), the effect is unlikely to be large, and in any case there is growing evidence that O&M expenditures have been underestimated by the industry. The German company Fraunhofer this week released news of an advanced, and as yet untried, rust protection system, intended to address what are explicitly admitted to be major corrosion problems with offshore wind turbines (see “The High Cost of Wind Turbine Maintenance”), suggesting that the offshore wind industry at least may not be able, however much it might wish the fact, to translate lower capital costs into a reduced requirement for subsidy.

As it is, falling wholesale prices, if they materialize, will make the Contracts for Difference already awarded seem very poor value for money, since lower wholesale prices increase the implied subsidy in the strike price.

Add to this the increasing cost of balancing the electricity system in the presence of renewable generators, through the very high predicted costs of the Capacity Mechanism, to say nothing of the cost of grid reinforcements to bring Scottish wind power into England, and the probable effect on prices and bills becomes a guessing game, though a fascinating one.

The silent alacrity with which DECC has taken the opportunity to let the Annual Energy Statement lapse – it was a Coalition government undertaking – is, however, unsurprising. They have never had much enthusiasm for this level of disclosure. When the Statement was last published, in November 2014, the crucial pricing spreadsheets behind the headline statements, released with every previous issue, were initially witheld, and were only released after behind-closed-doors protest, questions in the House of Lords, and a Freedom of Information request combined to put pressure on the department.

The spreadsheet in question shows the Department’s assessment of the impact of each policy on the price (and less importantly, because modelled with optimistic efficiency assumptions, the bill) for electricity and gas for various kinds of consumer, domestic and commercial, and in various fossil fuel price scenarios, Low, Central, and High. DECC’s decision to discontinue publication of these calculations is remarkable, but it is not difficult to imagine why they are reluctant. When the calculations were last released the combined electricity policy price impact (i.e. £/MWh) on domestic consumers in the Low Fossil Fuel price scenario, was + 42%. The impact on small business users was + 61%. The impact on medium-sized business consumers (with a Carbon Reduction Commitment) was +77%.

Given current falling fossil prices, it seems extremely likely that these impacts would in fact be even larger today if DECC repeated its calculations.

The Department of Energy and Climate Change, like the rest of government is under an obligation to be transparent. Business consumers need, and the public has a right, to know what government believes are the cost impacts of its climate policies in the context of sharply falling global fossil fuel prices. The current situation is unacceptable, and the Department should as a matter of priority resume publication of the Annual Energy Statement, including the full document set for Estimated Impacts.